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Pre-Qualification vs Pre-Approval: What’s the Difference?

If you’ve decided to ditch renting in favour of
purchasing a home, it’s essential that you get familiar with the process, from
start to finish. Right away, you’ll be bombarded with terms that may sound
alien to you – and the onus will be on entirely on you to educate yourself on
the lingo so that you have a solid idea of what buying your first home entails.

When conducting your initial research about
acquiring a mortgage, you’re likely to read about pre-qualification and
pre-approval. It’s crucial to understand what these terms mean, as they are the
first steps in the mortgage approval process.

What is Pre-Qualification?

Before being approved for a mortgage, lenders
will carefully look at your financial status, which means your income, assets,
and debt. They will calculate your affordability using a number of financial
metrics, namely TDS (total debt service ratio) and GDS (gross debt service
ratio). You cannot be approved for a mortgage until you satisfy certain
conditions that show you’ll be fully capable of making regular payments without
any difficulty.

Overall, the process is quick and simple, and
you’ll be provided with a tentative estimate on the amount the lender will be
able to let you borrow. Little documentation is required, and you don’t have to
fill out an application. Many financial institutions conduct these assessments
over the phone or online, and often, at no cost. They also don’t affect your
credit score.

What is Pre-Approval?

A pre-approval for a mortgage is when the lender
makes an actual commitment to fund your mortgage based on your financial
status.

At this stage, the lender will conduct a much
deeper and rigorous analysis of your current financial standing. Your credit
report will be assessed and you will have to fill out an official mortgage
application.

The lender will also need to verify certain
documents to satisfy the pre-approval requirements. You will you need to
present personal identification, proof of income, bank account details, other
debts you are liable for, personal assets, as well as confirmation of the down
payment.

You will have the opportunity to negotiate an
interest rate with the lender and be able to lock in this rate for a period of
60-120 days. Though a pre-approval is not a guarantee, as long as you abide by
the terms of the contract, you are fully pre-approved for that time frame.

In addition, the lender will work with you to
discuss your financial needs and help put together a mortgage plan. You’ll get
a chance to discuss the various types of mortgages available (fixed vs,
variable rate, closed vs open, amortization, etc.) and choose one that is most
suitable for you.

If you’re only thinking about purchasing a home, getting pre-qualified would
suffice, as it will provide you with a general idea of what you can afford to
borrow. When you make the leap and decide to purchase, it’s best to go through
the pre-approval process, so that you have the conditional commitment from a
lender, giving you the peace of mind knowing that you have secured financing
for your future home.

 

Contact Us Today:

Email: sarah.penney@ratefair.ca

Call: 780-405-5449